Phillips-Van Heusen Corp. increased its cash balance by $109.1 million over the past year, bringing it to $369.6 million at the end of the second quarter — and now the firm is looking to spend it.
On a conference call with analysts on Thursday to discuss the quarter’s results, PVH chief executive officer Emanuel Chirico said the money is likely earmarked for potential acquisitions.
“Our first priority would be continuing to look for acquisition opportunities, particularly ones that are branded in nature and potentially open up the opportunity for international distribution,” said Chirico. “I think we’ve demonstrated an ability in the past with some of our other acquisitions to integrate acquisitions well, get them on our platform and then maximize the potential of the brands.”
PVH acquired neckwear maker Superba in 2007, creating synergies with its legacy dress shirt business, and bought Calvin Klein in 2002 in a deal that radically transformed the company.
PVH has been looking at additional acquisition targets but has yet to find a suitable company, as the most attractive brands are reluctant to chase deals in a climate where valuations have been depressed, Chirico told WWD.
“There have been slim pickings so far,” he noted. “We’ve looked at some companies, but they’ve been troubled, and nothing has interested us so far. We haven’t found any brands that we think will create true consumer demand. And good businesses that we might be interested in don’t want to do transactions now, with valuation multiples where they are.”
However, Chirico is optimistic that deals will materialize in 2010 if the credit markets loosen and valuations go up.
PVH throws off about $100 million in cash each year. “We’re not a bank and when it accumulates, we need to return it to shareholders,” explained Chirico. “Ideally, that would be through an acquisition, but we could also consider a stock or debt buyback. We’ll end the year with about $400 million in cash and we’ll have to decide what to do with it.”
PVH ended the quarter with $399.6 million in long-term debt, which begins to mature in 2011. If an acquisition does not materialize, cash could be used to retire a portion of that debt. Similarly, the company could decide to buy its own common stock, as it did in the first quarter of 2007 when it purchased $200 million in shares.
Also on the conference call, Chirico addressed the stiff challenges facing its licensed Calvin Klein fragrance business with Coty Inc. Royalty revenue in the category was down about 25 percent in the second quarter ended Aug. 2, due to continued weakness in duty free airport shops and high-end department stores impacted by the recession. Despite the sales declines, Chirico said Calvin Klein has not lost any market share vis-à-vis competing brands, which face similar difficulties.
This fall, Calvin Klein will launch its new CK Free young men’s scent, which will be supported by a major advertising campaign. The first deliveries will be in stores at the end of this month.
Calvin Klein jeans and underwear royalties from licensee Warnaco Group Inc. were down about 10 percent in the quarter, or 4 percent on a constant currency basis, due to shifts in Warnaco’s sales calendar and the weak retail climate.
In bright spots, Calvin Klein’s license with G-III Apparel Group Ltd. — which includes men’s and women’s outerwear and women’s dresses, suits and better sportswear — posted strong growth, with royalty revenue up more than 20 percent in the quarter. PVH expects the G-III business to become the second largest Calvin Klein license within the next six months, surpassing Coty and behind Warnaco. Coty’s Calvin Klein fragrance business is about $1.3 billion at retail and Warnaco’s jeans and underwear is about $2.2 billion.
PVH’s dress shirt and neckwear division posted a 2 percent sales gain in the quarter, gaining 6 percentage points in market share over the last year, according to Chirico. More than one-third of all dress shirts sold in the U.S. are made by PVH.
In PVH’s retail segment, comp store trends have improved in the past few months, even moving into positive territory last month. “In July, we posted a 1 percent comp store increase for the month and this improvement of 1 percent has continued into the first two weeks of August,” said Chirico. For the full second quarter, retail comps were down 3 percent, compared with an 8 percent drop in the first quarter.
PVH’s net profit for the second quarter slid 9.1 percent to $26.6 million, as revenue dipped 5.6 percent to $529.3 million.